India to move to T+1 Settlement System

Subject : Economy

Section : Money Market

Concept :

After China, India will become the second country in the world to start the ‘trade-plus-one’ (T+1) settlement cycle in top listed securities from January 27.

Background :

Until 2001, stock markets had a weekly settlement system.
The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.

T+1 Settlement Plan

The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
This is different from T+2, where they will be settled on Friday.
As many as 256 large cap and top mid-cap stocks, including Nifty and Sensex stocks, will come under the T+1 settlement from January 27.
The United States, United Kingdom and Eurozone markets are yet to move to the T+1 system.

Benefits of T+1 Settlement:

Reduced Settlement Time: A shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralise that risk.
Reduction in Unsettled Trade: It also reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%.
The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade.
Reduction in Blocked Capital: Further, the capital blocked in the system to cover the risk of trades will get proportionately reduced with the number of outstanding unsettled trades at any point of time.
Reduction in Systemic Risks: A shortened settlement cycle will help in reducing systemic risk.

Will T+1 Format make Markets Safer?

According to a paper published by the Securities and Exchange Board of India (SEBI), a T+1 settlement cycle not only reduces the timeframe but also reduces and frees up capital required to collateralize that risk.
A shortened settlement cycle also reduces the number of outstanding unsettled trades at any point of time, and thus decreases the unsettled exposure to Clearing Corporation by 50 per cent.
The narrower the settlement cycle, the narrower is the time window for a counterparty insolvency/ bankruptcy to impact the settlement of a trade.
Further, the capital blocked in the system to cover the risk of trades will get proportionately reduced with the number of outstanding unsettled trades at any point of time.

Concerns of Foreign Investors:

Foreign investors have concerns about operational issues they would face while operating from different geographies – time zones, information flow process, and foreign exchange problems.
They will also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.